Wednesday, August 10, 2011

Jeremy's Grantham Quarterly Newsletter August 2011 Summary (Part 2)

Jerey Granthan from GMO has just released the second part of its Quarterly Newsletters entitled "Danger Children at Play".

He shortly talks about the debt ceiling debacle and how developed economies are can-kicking, but then focuses on his "Seven lean years" prediction of 2009 where he saw weak growth of 2% per year, and analysis the positives and negatives as of today.

Positives:

Economic growth rates in emerging economy

US / China Trade Surplus/Deficit has shrunk

US Personal savings are up

Corporate profits

Negatives:

Disillusionment with Institutions, especially congress.

Commodities price are higher than expected

Balanced budgets now impossible without reducing spending or increasing tax or both

Housing bust overhang to remain for years

Modest personal income progress and large income disparities between the rich and the middle class in the US. (US Real Average Hourly Earnings Index is down over 40 years)

He then moves on to focus on corporate profits that are so high that they seem completely disconnected from economic reality. Those profits are likely due to government spending and when it stops you can expect profits to tumble.

In his Q2 newsletter, he predicted a market correction because of Libya, Japan and high commodities price, and still recommend to keep your head down until we reach fair value (S&P to 950) and hold shares of high quality companies.

Finally, he makes some buying recommendations:

Managed farmland and forestry

Commodities such as hydrocarbons, metals and fertilizer over a 10 year horizon. However, since there have gone up substantially over the last few years, waiting for a pullback maybe safer

Quality Stocks

Emerging markets

Japanese Stocks

To conclude, he warns that historically markets usually become cheap and stay that way for many years and that we should not normally expect any bounce when the markets reach fair value and that GMO is starting to be cautious buyer (the first time since mid 2009) at those levels with a portfolio composed of US high quality, Japan, Italy and European growth stocks